Closed-form Transformations from Risk-neutral to Real-world Distributions
نویسندگان
چکیده
Risk-neutral (RN) and real-world (RW) densities are derived from option prices and risk assumptions, and are compared with densities obtained from historical time series. Two parametric methods that adjust from RN to RW densities are investigated, firstly a CRRA risk aversion transformation and secondly a statistical calibration. Both risk transformations are estimated using likelihood techniques, for two flexible but tractable density families. Results for the FTSE-100 index show that densities derived from option prices have more explanatory power than historical time series. Furthermore, the pricing kernel between RN & RW densities may be more regular than previously reported and a more reasonable risk aversion function is estimated.
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